Morgan Stanley Cuts Cummins To Underweight

• Cummins Inc (NYSE: CMI) shares have been treading a downward path in 2015 and are down 30 percent year-to-date.
• Morgan Stanley’s Nicole DeBlase downgraded the rating on the company to Underweight, while reducing the price target to $79.
• Impediments to secular growth and market share remain concern areas, DeBlase stated.

Analyst Nicole DeBlase mentioned that Cummins’ shares are expected to underperform in the near future due to several major headwinds being faced by the company. Growth in the company’s Components business is dissipating, as developed markets shift regulatory focus from emissions to fuel economy.

Revenue growth at Cummins’ Emissions Solutions segment is expected to converge with production, resulting in a $0.35 headwind to the company’s EPS. Market share of the company’s NAFTA Engine business is also likely to be eroded, leading to an EPS risk of $0.40-$0.65, DeBlase said.

The EPS estimates for 2015 and 2016 have been reduced from $2.68 to $2.36 and from $2.90 to $2.25, respectively, to reflect the impact of various headwinds.

Aggressive capital allocation may allow Cummins to post better-than-expected earnings. The Morgan Stanley report noted, “[We] believe long-term investors prefer organic growth over financial engineering.”

“While the negative reaction to today's 3Q miss and 2015e guide-down implies increasing awareness of cyclical risk, our bearish call focuses more on the impediments to secular growth and market share,” DeBlase added.